What makes a better wedding gift – gold jewellery or gold bonds?

The value that we Indians place on gold needs no elaboration: we love it so much that we even offer to it to our gods. So, it is hardly surprising that the yellow metal has for long been an integral item in bridal gifts – traditionally as jewellery, but these days also as biscuits and coins. 

Of late, however, another option has emerged as a popular alternative to physical gold when it comes to wedding gifts: paper gold, which comes in the form of exchange-traded funds (ETFs) and gold certificates (Sovereign Gold Bonds or SGBs). It is usually SGBs that are more popular as wedding gifts; people typically go for ETF investments mainly with financial returns in mind.

Of course, there is yet another form of gold in the market – digital gold or e-gold. This is gold that one does not possess physically. But like ETFs, this too is more preferred as a wealth creation tool, though one can also gift it digitally.

So, the preferred gifting options are physical gold (mostly jewellery) or SGBs. The question is which makes the better wedding gift: physical gold, or the paper version in bonds? Let us compare the pros and cons of each, assessing their intrinsic worth as investments.

Related: 5 Gold schemes offered by jewellers and how they work

Physical gold

When we gift physical gold, the most widely preferred form chosen is jewellery. Of course, much of this preference stems from centuries-old tradition. But in the modern context, this tradition poses some extra problems.

• GST: The first problem is the multiple costs that an investment in jewellery entails. First, there is the cost of the gold itself, which includes 5% GST (assuming the item is bought from a GST-registered outlet).
   
• Making charges: Then the jewellery store from where you buy the item imposes ‘making charges’ for creating that piece of jewellery; this goes into the purchase price of the gold; now there’s GST on making charges as well, which raises the overall price. All the while, the intrinsic value still remains less than that of the jewellery.
   
• Hidden cost: Third, there is a hidden cost; some gold is wasted in the making process, the cost of which is passed on to the buyer. Hence, you as the investor-buyer are paying for gold that you have not received.
   
• Packing: Fourth, you are paying for the packaging; fancy ornament boxes cost money, and that is included in the jewellery item’s selling price.
   
• Locker charges: Costs don’t end here. You or the recipient of the gift needs a safe place to store the jewellery (this goes for gold bars and coins too). You can keep them safely in bank lockers but they too come at a certain cost (the annual rent for a medium-sized locker at State Bank of India is Rs 4000).

After all this, the resale value of the jewellery is always going to be less than the purchase price. First, you are never sure of the purity of the gold you are buying unless it is BIS hallmarked. Second, the making charge you paid is not going to be a consideration during reselling. On the plus side, for the receiver (who did not have to pay for the gift in the first place), it would be very easy to liquidate the gold jewellery in times of financial emergency.

This liquidation attracts capital gains tax. If sold within three years of purchase, there will be a short-term capital gains tax as per the seller’s income tax slab, while a long-term capital gains tax for sale after this period would be at 20.8% with indexation.

These tax rates exclude surcharge at 10% on income between Rs 50 lakh and Rs 1 crore and at 15% on income above Rs 1 crore.

Related: Here's how you can hold gold in demat form just like equity shares or mutual fund units [Premium]

The Sovereign Gold Bonds (SGB) advantage
This brings us to Sovereign Gold Bonds (SGB). Issued by the Reserve Bank of India (RBI) on behalf of the government, SGBs are government securities denominated in grams of gold. This paper form of gold serves as a substitute for holding physical gold. 

The ‘paper gold’ or gold bonds are sold in multiples of one gram of gold, which means the minimum investment is the price determined for one gram of the precious metal. In other words, the minimum permissible investment is one gram of gold. Investors have to pay the issue price when purchasing the bonds, which are redeemed on maturity. The maturity proceeds (as well as interest earnings) are credited to a bank account of the bond purchaser, as per records. Bonds are sold through nationalised as well as scheduled private and foreign Banks, designated post offices, the Stock Holding Corp, and authorised stock exchanges either directly or through their agents.

SGBs are issued by the Government of India, and carries sovereign guarantee. This makes it a safe investment. At the same time, it is also a simple investment because you can do it online from the comfort of your room. (Incidentally, the government gives a discount of Rs 50 for investors who apply for SGB using the digital mode).

Factors make gold bonds a superior alternative to jewellery

• High liquidity: First, it is highly liquid as it can be used as collateral for loans, just like jewellery. However, unlike physical gold, SGBs can be traded on the stock exchange.
   
• Linked to the price of gold of 999 purity: Second, its prices are linked to price of gold of 999 purity (24 karat) published by the India Bullion and Jewellers Association (IBJA). Since a gold bond is liquid, investors can sell it easily when gold prices rise.
   
• Fixed interest rate: Third, the investor is paid a fixed interest rate (the current rate is 2.5%), similar to what a fixed deposit in a bank earns. They are paid twice a year on the nominal value, which is credited to investor’s bank account.
  In fact, this is one of its major attractions, as returns are usually linked to the prevailing market price of gold. This means the investor (or if it is a wedding gift, the recipient) gets a fixed interest in their bank account in addition to market value of gold at the time of maturity.
   
• Taxable: But do remember that interest on SGBs is taxable as per the Income Tax Act, 1961. In case of redemption, the capital gains tax applicable to an individual is exempted. That apart, the LTCG generated is provided with indexation benefits, even after it has been gifted. To understand tax implication on SGB read this article — Sovereign
   
• Gold Bonds: An attractive tax-free wealth creation investment option
   
• Holding cost: Fourth, the holding cost of an SGB is negligible when compared to the locker expenses associated with security of jewellery. It’s a certificate, so it can be kept in your bedroom almirah.
   
• No capital gains tax: Fifth, there is no requirement to pay capital gains tax or TDS at maturity or redemption.

Related: Gold ETFs vs Physical gold: Which one is better?

Last words

Financial experts always advise having gold in one’s portfolio, in whatever form, as it holds its own during market volatility, and is therefore seen as a comparatively stable investment and hedging instrument. Read this article to know why gold needs to comprise 5-10% of your investment portfolio?

However, when this gold holding is broken down to its various forms, jewellery lags as an investment. In fact, even within the physical gold group, jewellery is less attractive than gold coins because of the purity factor. Gold coins and bars are mostly of 24 karat purity, which is 99.9% pure gold.

This high level of purity also makes the gold too hard for making ornaments; for that, other metals like silver, zinc, nickel, and other alloys have to be added to it, which makes the ornament more durable. But in the process, its purity drops to 22 karat or 18 karat.
So when compared to SGB, jewellery trails once more because gold bond prices are linked to the price of 24 karat gold. Consider this along with the advantages listed above, and the only point you will find going in favour of gold jewellery is tradition. Gold ETFs vs Physical gold: Which one is better?